Last summer, Philadelphia attorney Shane Heskin told Congress that Pennsylvania has strong laws to prevent consumers from getting scammed on loans – but none protect business owners.
“Consumers have laws that protect them from usurious interest rates,” he said. “But for small businesses, those protective laws don’t apply at all.”
Heskin defends fast-earning business owners in court from what he claims to be deeply predatory “merchant cash advance” lenders. Although he and other industry critics have yet to gain traction among Harrisburg lawmakers, warnings hit home when federal regulators brought a large-scale trial versus Par Funding, a Philadelphia lender of more than $ 600 million to small businesses nationwide.
The lawsuit described Par Funding as an “opportunistic” lender who charged traders extremely high interest – 50%, on average, but often astronomically more – for borrowing money. When debtors fell behind, the United States Securities and Exchange Commission said earlier this year, Par sued them by the hundreds, while hiding the massive number defaults by investors who had invested the money Par lent.
Par and others in the MCA industry, as it is called, have thrived on two legal strategies.
One is a matter of semantics: companies insist that they don’t make loans, but rather advance money from profits on future sales. This frees MCAs from usury laws that cap interest.
While Pennsylvania does not have a cap on business loans, other states do, including New Jersey, New York, Texas, and California.
The other, even more powerful, legal weapon is what is called an “admission of judgment”. Lenders such as Par include a clause in loan documents that requires borrowers, in effect, to “confess” that they will not fight through the collection stages to foreclose their income.
Heskin detailed the abuse during a United States Chamber Hearing last year, titled “Crushed by Confessions of Judgment: The Small Business Story”.
Once a borrower misses payments, “they start taking money out of your account” based on these admissions of judgment. Heskin said Par and other MCAs were taking salaries, siphoning money from bank accounts, and even threatening to foreclose on borrowers’ homes.
New York and New Jersey have banned trial admissions for the past two years, joining a handful of other states, but no Pennsylvania lawmaker has proposed a ban.
New York and New Jersey attorneys general, the SEC and the Federal Trade Commission have started cracking down on cash advance abuse, but Pennsylvania Attorney General Josh Shapiro has yet to comment on the issue. question.
In August, the FTC sued Yellowstone Capital, a New Jersey firm that pioneered this controversial financing niche, accusing it of hitting borrowers with hidden fees and overcharging them in collections. In June, the FTC and New York Attorney General Letitia James jointly sued two other lenders, laying similar charges.
In the New York State lawsuit, James alleged that a manager of a company told a borrower, “I know where you live. I know where your mother lives. I’ll take your daughters. … You have no idea what I’m going to do.
Au pair funding, in particular, has been pursued by allegations that this is a modern approach to loan sharking.
In a lawsuit against her, a Miami borrower alleges that a debt collector repeatedly threatened and cursed employees and, at one point, threatened to break the legs of the business owner. The federal lawsuit says another collector, Renata “Gino” Gioe, showed up at the office in 2018 to say, “I have to fix this now that I’m here in Miami. This man has to pay or I’ll use it. old-fashioned New Yorker Italian.
(The lawsuit was dismissed last month on technical grounds unrelated to the allegations involving Gioe).
Last month, the FBI arrested Gioe, a criminal and bodybuilder, and accused him of threatening a New Jersey debtor. In 2018, a series of Bloomberg Businessweek surveys on cash advances to merchants had identified Gioe as a collector of Par who the dealers claimed had made threats.
Par Funding co-founder Joseph LaForte has denied the allegations of threats. He is a two-time convicted felon awaiting trial for illegal possession of firearms.
After federal and state lawsuits were filed in New York City, FTC Commissioner Rohit Chopra released a sharp statement, saying the agency should ensure that lenders “serve small businesses, not exploit them.”
Although some companies tout flexible repayment terms, Chopra said this “can be a sham because many of these products require fixed daily payments, and lenders can file” admissions of judgment “on any slowdown in payments. , without notice or due process for borrowers. “
Merchant cash advance companies became popular about two decades ago. Supporters say retail and e-commerce giants like Amazon, Paypal and Shopify were among the first to become billion dollar lenders of money to small businesses, tying loans to future sales.
Grant Phillips, a lawyer from Long Beach, NY, who also defends debtors against cash advance lenders, said the 2008 tax crisis generated strong growth in merchant cash advance companies as conventional banks retreated.
“This can be a viable alternative to conventional financing,” Phillips said. “It really is an American invention, and it is legal.”
“Small businesses couldn’t get loans after the great financial crisis, and merchant cash advance lenders filled that hole,” Phillips said. “I can charge higher daily interest than usury law, because technically I’m buying future sales. A loan.”
At the same time, Phillips said, “There is no regulation, no interest cap. It opens the door to greed.
Sean Murray, Editor-in-Chief of deBanked.com, a trade publication that covers merchant cash advance companies, said Amazon, PayPal and Shopify, as well as newcomers Kabbage and QuickBooks Capital, have operated with little controversy. According to Murray’s estimate, the industry lent $ 8 billion to small businesses five years ago. Last year, he said, the amount had more than tripled.
“There are some good people in this industry,” Murray said. “And there are a lot of small businesses that can’t get a loan from a bank.”
More than half a century ago, the Supreme Court of Pennsylvania, in Cutler Corp. vs. Latshaw, called the confession clause of judgment a necessary evil.
It is, the court wrote in 1954, “perhaps the most powerful and drastic document known in civil law” and “equivalent to an ancient warrior entering a fight by throwing down his shield and breaking his sword”. But the clause was legal, the court said, as long as “the helplessness and impoverishment of borrowers was willingly accepted and consciously assumed.”
Nonetheless, the FTC banned admissions of judgment against consumers nationwide in 1985. An increasing number of states are banning them for consumers or businesses. New York and New Jersey recently joined about seven other states in imposing outright bans to protect businesses as well.
New York did it last August after Bloomberg Businessweek, in its 2018 survey project, reported that the state had become a national focal point for cash lawsuits against borrowers against traders and the filing ground of 25,000 lawsuits. What attracted the lenders was a legal system that leaned overwhelmingly in their favor: New York immediately let them dip into defendants’ bank accounts and seize assets before borrowers even learned they had been sued. .
In August 2019, New York City banned admission of judgment prosecutions against out-of-state defendants.
Par Funding, for its part, suddenly began filing hundreds of other lawsuits in the Philadelphia Common Plea Court. Records show the company filed 777 lawsuits there in 2019, nearly six times the number the year before.
“These clauses confer immense power and severely limit due process,” said attorney Benjamin Picker, of McCausland Keen law firm in Chester County, who also testified before Congress regarding cash loans to traders.
Once lenders are armed with an admission of judgment, he said, they can “skip the whole litigation process and proceed directly to obtaining judgment against the other party without any possibility of judgment. ‘to be heard by the court “.
To date, the lawsuits against Par Funding and other merchant cash advance lenders have not prompted any action in Harrisburg.
State Senator Thomas Killion (R., Delaware) is the only Philadelphia-area GOP lawmaker to serve on the Republican-controlled Upper House Banking Committee.
“We looked at payday loan abuse, but not business loans,” Killion said in an interview. “I have been following the story and this is something we need to look into.”
In Washington, legislative fervor is a little stronger. An unlikely pair – Republican Senator Marco Rubio of Florida and Democratic Senator Sherrod Brown of Ohio – last year jointly presented a bill to extend the FTC’s ban on consumers’ admissions of judgment to businesses. Their proposal did not come out of the committee.
In the US House, US Representative Nydia Velázquez, a Democrat from Brooklyn, pushed for a similar bill. Its measure has been voted out of committee along partisan lines and awaits a vote from the entire chamber. Republican opponents in the House said a ban on judgment admissions would stifle a key source of lending and could “ultimately increase the cost of credit for smaller businesses.”
Locally, U.S. Representative Madeleine Dean, a Democrat who represents Montgomery County, is pursuing predatory lending issues on Capitol Hill, including the Fair Debt Collection Practices Act for the military. it would be ban debt collectors to make certain threats against military personnel, for example by claiming that they would lose their rank if they did not pay.
“We have a loophole in our federal laws.” said the dean. “And we should follow New York’s lead in getting rid of the admissions of judgment.”